European Sub-zero Deposit Rates Imminent As Eurozone Inflation Tumbles To March 2009 Levels

If Mario Draghi was waiting for the latest Eurozone inflation data to cement his decision to unleash negative deposit rates, if not more, in the Eurozone, he got it earlier today when Eurostat reported that May inflation tumbled to 0.5% - matching the cycle lows and the lowest since March 2009 - down from April's 0.7%, below the 0.6% expected, and less than half the ECB's target. In other words, despite everything tried in Europe nothing is working, and the most important chart - that showing the collapse in lending to private companies - not due to lack of supply but due to no demand, continues to be the most relevant one. Sadly, it is the one Draghi has shown over the past three years he has virtually zero control over.

Broken down by segments, the biggest drop in prices was in Energy and non-energy industrial goods, with food and alcohol rising a modest 0.1%, as services rose by the most or 1.1%.Still, even the core number of 0.7% came in below the 0.8% expected and down from 1.0% in April.

The commentators quickly commented:

“It’s a surprise, but not enough of a surprise to change materially the global economic outlook that the ECB will release on Thursday,” said Michel Martinez, an economist at Societe Generale SA in Paris. “What seems highly likely is that the ECB will cut key rates and probably also inject further liquidity.”

"Today's inflation numbers underscore the need for the ECB to act. The ECB has consistently underestimated the deflationary forces threatening Europe and now is the time for unconventional monetary policy," said Dominic Rossi, Global Chief Investment Officer at Fidelity Worldwide Investment.

The market response, as we already noted, was paradoxical, with Bunds selling off on the data:

German 10-year government bond yields, which hit 12-month lows last week, rose 3.1 basis points to 1.34 percent. Bund futures declined. Some traders said the weak inflation data was already priced into the market and prompted investors to book profits after a recent rally.

"That number was if anything bond-friendly. We expect the Bund to regain its momentum and start rallying again ahead of Thursday's ECB meeting," one trader said.

And now everyone looks forward to Thursday's ECB monthly announcement, curious what non-existant bazooka Draghi will pull out of his sleeve. As Bloomberg summarizes, the ECB has prepared investors for the prospect of stimulus when it announces the rate decisions on June 5. “We are ready to act,” ECB Vice President Vitor Constancio said on May 30. “We are not complacent about the risks from a protracted period of low inflation.”

“The ECB will announce rate cuts, including the deposit rate into negative territory,” said Martinez, who was one of the few economists accurately to forecast the May inflation rate in Bloomberg’s survey. The ECB will probably also stop sterilization of its Securities Markets Program and announce a targeted longer-term refinancing operation, Martinez said.

However, a possible interest rate cut by 0.1 to 0.15 percentage point would have little impact, as the rate tool has been exhausted, former ECB chief economist Juergen Stark wrote in today’s Frankfurter Allgemeine Zeitung.

As for negative rates? Well, let's look at the example of Denmark which introduced negative rates nearly two years ago. Did it have an impact on lending? As the following chart courtesy of @GreekFire23 shows, the answer is: not at all.

None of this matters: what does matter is for the ECB to exude confidence and pretend like it knows what it is doing even as it is becoming increasingly clear that the reality is anything but.

Swiss banks have been charging negative deposit rates to institutional clients and interbank deposits on Swiss Francs since 2012, I think. Individual depositors are not charged negative rates, however (I assume they earn the lofty rate of zero, but never checked).

Like 'dark matter.' They 'know' it's there, just can't see it or prove it. I believe the dark matter lies between the ears of the evil doers, behind the curtain or right up on the front row of the circus.

Something is seriously wrong when massive money printing can't translate to inflation. Been to the grocery store lately or checked out a new home? Inflation,at least using the classic definition, was an increase in money supply. I guess they just haven't printed enough yet. I guess if prices for everything doubled, we could declare victory? What could go wrong?

Modern Monetary Theory often referred to as MMT to its many believers removes much of the risk ahead and guarantees that we will always be able to muddle forward. MMT also known as neochartalism is a economic theory that details the procedures and consequences of using government-issued tokens and our current units of fiat money. Newly acquired tools like derivatives and currency swaps allow us to print and manipulate away problems.

While reading an article about the growth of debt in China's non-financial sector I was forced to reflect on how debt is effected by the interest rates. In Europe the ECB had to step in to halt the economic collapse of Spain, Italy and several other countries that were on the brink. What you pay in interest on debt does matter accept in the manipulated land of MMT. Have we been lulled into complacency by the extraordinary actions taken by central banks and governments over the last six years? This is a key question we must face. More on this subject in the article below.

People who believe what you're saying are the reason we're in the fix we're in. This 'pie-in'the-sky' 'you can borrow your way to prosperity' thinking - doesn't work. Never has; never will. BS on you AdvancingTime.

Yeah well.... if you want your Magical Money Trees, you can keep them!

I fail to see how more 'tokens' solve the problems we face. Unless of course you get a pile of them first, and for free..... like the banks. Then it is a winner.

I predict MMT will come to the fore as those in charge realise they are out of ideas to sell the proles and need to dress up the next stage of theft in something which sounds like it has a theoretical base.

Yes you are right - a government which prints its own money can always pay its own demonimated debts. Like Wiemar, Zimbabwe, France (Assingnats).... the list goes on and on and on and on and on and on and on (bit like MMT'ers)

I just don't see why these people can't grasp that while they can create an infinite amount of whatever currency they want, that infinite amount of currency is chasing a finite quantity of good and especially energy. It's created inflation. Always has, always will. The only people that benefit from it are the ones who get this newly created currency first, and they benefit at the expense of everyone else. In a just world, this would be criminal counterfeiting.

The middle class here in the US is depleting their 401k and savings to live on. What happens when that money is gone? The answer in one word...DEFLATION. The one word Old Yellen and the rest of those out of touch bankers fear most.

Because in the old day, when you wanted to get married, the dowery for woman in europe for common people was about 20franks. And that came in a single gold piece. And to divide the "wealth, the took the coin and made 2 rings from it by working the coin.

I collect every latin monetary gold coin and have most of them. I recently found a 25fr belgium gold coin that is so rare you won't believe and now I'm talking the price down but it goes slow. I just need to have that coin :) Must!!

And after that I want one of the only 100fr gold coins from 1880 made in Belgium. And there's one for a sale in Swiss for a pretty "normal" price so that's also on the list. I'm not going to tell here where the coin is :) but it looks like this:

If I had the dosh, I would probably be looking at some of the Asian gold coins. Butt, sigh, no dosh... I might as well be Jesus, taken a vow of poverty. ...or perhaps, Moses, take down Pharoah with a great dollop of faith. HA, fat chance!

It is revolting. Anti- big govt/bank/corp Tyler still has no problem taking googles money. I was shopping on a travel site and had to turn ghostery off to load everything, and forgot to turn blocking back on before coming over here, and it had to be 40 different things that popped up. Literally more than any other sight I've been to

Yes, it's kind of putting me off coming here. I know ZH needs operating funds, but if Tyler is living in a 10,000 sq/ft house with five bimbos and a ten car garage full of exotic metal, then he is no better than the rest of the bloodsucking vampires. Tyler, chime in and defend yourself.

The central bankers are going to print..it is the only thing they know how to do and can do....at 0% interest rates..printing is the only tool left....and it will go on for a very long time..until the collapse.....the politicians are not cutting spending...increasing it yes....every day is a new crisis that needs money thrown at it.....and they will....so get used to 1 to 2% growth....and a trilllion or more in debt every year increases

The irony here, will be that by confiscating depositor's money with sub-zero interest-rates, the authorities in Europe, will create even moar deflation. But before that, we'll have moar bank runs, for anyone who doesn't want to expose their deposits to an annual hair-cut via the sub-zero interest rates, they'll be pulling their money out, and stuffing it NOT in a bank, thus money velocity will tank even moar. Anyone could be excused for thinking that this may be by design...hahaha

The thing that gets me about this whole mess is that they claim that they want growth, however the politicians will do anything they can destroy any business opportunities. Cognitive dissonance with these assholes is ridiculous.

I commented on this idea yesterday. They have two choices: growth or maintaining themselves in full control. As long as they "control" growth, there will be no growth. The only way for growth would be for them to stop trying to control it. Since that is impossible for them to even conceive of, given their hubris and narcissism, we are going to go to collapse before we get to growth. End of Story.

Keep printing, banksters!
I added to my PM stash today, with 1/3rd of this month's budget standing by for yet another "just in case, let me teach you a lesson" type of drop in PM prices when the eurotrashers announce how they plan to "help" us.
Who knows, if things get even crazier we may even be able to buy silver for $16-17/oz, although I don't think we'll get that lucky.

About the only thing deflating in Europe is the way overpriced housing market. Just like in the US the real prices of real products are going up. Any sense of deflation in those real products is due more to a stronger Euro which only affects the price of a few products. And do you think Russia is going to 'lower' natty gas prices anytime soon?

The real reasons for negative interest rates are so the big banks can start tapping the savings of the savers - even though those savings are little more than electronic obligations that the banks hope they can avoid paying back out to the savers.

With the problem being the parasitic private banking sector having got so large it is killing the European economic dog perhaps Mr Draghi should try a plan that shrinks the parasite rather than proposing plans that grow it.